Home Equity Loan Limits: How Much Can You Borrow With a HELOAN or HELOC?

How Does a Home Equity Loan Work?

A home equity loan allows you to make your home’s value liquid by taking out a loan against its equity. You can find your home equity by subtracting your remaining mortgage balance from your home’s current market value. To put this into perspective: if your property is valued at $600,000 and your current mortgage stands at $250,000, you’ve built up around $350,000 in home equity.

When you take out a home equity loan, you’ll get a lump sum of money that you’ll pay through fixed monthly payments over a set term, typically 5-40 years. The loan is secured by your home, which usually means you’ll get a lower interest rate than unsecured loans like credit cards.

HELOAN vs HELOC

As of the beginning of 2024, the average homeowner in the United States has about $300,000 in home equity. But how do you access that equity and turn it into cash that you can use for renovations, upgrades, investments, and big purchases?

When you want to tap into your home’s equity, there are two common options to choose from: home equity loans and home equity lines of credit.

A home equity loan (HELOAN) works much like your primary mortgage — the main difference is that you can use the funds for anything. This option offers a one-time lump sum with a fixed interest rate and predictable payments. A HELOAN is ideal if you need a specific amount for a significant expense like home improvements or to consolidate debt.

A home equity line of credit (HELOC) works more like a credit card. You get approved for a maximum HELOC amount based on several factors and can borrow what you need when you need it during the draw period. Most HELOCs have variable interest rates, though some lenders offer a fixed-rate HELOC option.

Why Do Lenders Set Home Equity Loan Limits?

Lenders set home equity borrowing loan limits to protect themselves and borrowers. Keep in mind that these are home equity loan borrowing limits, not income or loan amount limits. Instead, home equity loan limits determine the percentage of equity you can tap into.

Property values can fluctuate over time. If you borrowed against all your equity and home prices dropped significantly, you could end up with an underwater mortgage, leading to you owing more than your home is worth. This puts both you and the lender at financial risk.

Keeping some equity untapped also provides a buffer against market changes and ensures you maintain some ownership stake in your property. This is especially important if you need to sell your home or refinance in the future.

How Much Can You Borrow With a Home Equity Loan?

The maximum HELOC or home equity loan amount you can get depends on several factors, such as:

• Available equity: Most lenders allow qualified borrowers to access up to 80-90% of their home’s value across all loans (including your primary mortgage). Griffin Funding lets eligible borrowers tap up to 90% of their equity.
• Credit score: A healthier credit score typically means you can borrow more. Lenders view good credit as a sign you’ll repay the loan responsibly.
• Debt-to-income (DTI): This compares your monthly debt payments to your income. A lower DTI shows lenders you can easily manage your debt based on your current income, while a higher DTI signals that you might not be able to afford an additional loan.
• Property type: Loan limits might differ for primary residences versus investment property loans.

If you’re wondering, “How much equity can I borrow from my home?” Here’s an example of how to calculate your potential borrowing limit:

• Home value: $400,000
• Current mortgage balance: $250,000
• Maximum combined loan-to-value (CLTV) ratio: 90%
• Maximum total debt: $360,000 (90% of $400,000)
• Available equity to borrow: $110,000 ($360,000 – $250,000)

How to Increase Your Maximum HELOAN or HELOC Amount

Several strategies can help you qualify for a larger maximum HELOAN amount, such as:

• Boost your credit score: Focus on making consistent, on-time payments while keeping credit card balances low and avoiding new credit applications.
• Strengthen your debt-to-income ratio: Strategically pay down existing debts, pursue additional income opportunities, or consolidate debt to improve your financial profile.
• Increase available equity: Make extra mortgage payments when possible or complete strategic home improvements that add meaningful value to your property.
• Maximize your home’s appraised value: Document all improvements, gather evidence of comparable sales in your area, and consider requesting a new appraisal if local property values have risen significantly.

See If a Home Equity Loan Is Right for You

Knowing how a home equity loan works is just the first step in the process when you want to tap into your home’s value. Before applying, carefully consider your financial goals and circumstances. While home equity loans can offer lower rates than other financing options, remember that you’re using your home as collateral.

Ready to explore your options? Check out the Griffin Gold app to see current rates and get personalized recommendations based on your situation.